Fair Isaac Corporation's (NYSE:FICO) price-to-earnings (or "P/E") ratio of 64.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Fair Isaac has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Fair Isaac
NYSE:FICO Price to Earnings Ratio vs Industry January 4th 2024
Want the full picture on analyst estimates for the company? Then our free report on Fair Isaac will help you uncover what's on the horizon.
How Is Fair Isaac's Growth Trending?
Fair Isaac's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 20%. Pleasingly, EPS has also lifted 114% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.
In light of this, it's understandable that Fair Isaac's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Fair Isaac maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Fair Isaac that you need to be mindful of.
You might be able to find a better investment than Fair Isaac. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
